The global macro environment can be characterised as one of stable growth and relatively benign inflation, resulting in well-anchored global monetary policy expectations. Risk assets can continue to perform in this environment, but the most obvious gains may have already been realised in 2019, meaning investors need to look for incremental returns beyond the mainstream asset classes in the year ahead.
Aberdeen Standard Investments sees structural growth opportunities in Chinese equities and emerging market (EM) bonds in 2020. These assets offer diversification benefits and attractive potential risk-adjusted returns, yet remain grossly underrepresented in global asset allocators’ portfolios.
Nicholas Yeo, Head of China Equities at Aberdeen Standard Investments, comments: “2020 has kicked off with a fairly positive backdrop for equity markets including the soon-to-be-signed US-China phase one trade agreement, more monetary stimulus from the PBOC, and indicators pointing to stabilisation of Chinese economic growth. However, volatility will likely remain in play given potential economic and political obstacles to a more comprehensive US-China trade deal, and also uncertainty in the build-up to the US presidential election.
“Against this backdrop, we observe that domestically focused Chinese firms are better insulated from a possible deterioration in trade relations or global growth. China’s huge domestic economy will remain well supported by rising wealth and consumption as well as targeted monetary and fiscal stimuli.
“The spending power of China’s fast-growing middle classes will continue to drive local company revenues and profits. This will translate into investment opportunities. We see continued growth in the high-end food and liquor, travel, health care and life insurance sectors. With an overall robust company earnings outlook , A-share valuations appear relatively attractive too.
“Our strategy is to be selective, and holding quality companies that have strong balance sheets, good governance and that are set to benefit from structural trends such as the broadening of domestic consumption. We believe they will be the winners over the long term.
“In addition, we think the inclusion of A-shares into global benchmark indices will help to institutionalise the onshore domestic market, improving governance standards and acting as a tailwind for foreign investment into Chinese stocks. Well-run companies with good capital management should outperform over time.”
On the outlook for emerging market fixed income, Mark Baker, Investment Director – Emerging Market Debt at Aberdeen Standard Investments, comments:
“In contrast to economic stagnation in the developed world, EM growth remains relatively robust. We expect the growth differential between EM and developed markets to widen in 2020, driven by economic recovery in a handful of the larger emerging economies. This dynamic is typically a bullish signal for EM assets, especially currencies.
“There is scope for incremental policy rate cuts in a number of EM economies including Brazil, Mexico, Indonesia, India and the Philippines. However, rate-cutting cycles are now at an advanced stage, meaning duration gains may be modest in the year ahead.
“We see idiosyncratic investment opportunities in domestic frontier markets such as Ukraine and Egypt, where authorities have embarked on significant macroeconomic reforms. Strong demand for US dollar denominated assets is likely to persist in a low policy rate environment, likely resulting in greater spread compression for EM high yield sovereign and corporate credit bonds relative to high grade ones.
“Closer to home we also see attractive opportunities in Asian local markets, particularly in China and India. Continued interest rate reform will provide a supportive background for duration in China, while Indian local currency corporate bonds offer both attractive income returns and scope for capital gains.
“We expect the pursuit of yield to result in healthy flows to emerging market bonds. Despite the capital gains already experienced in 2019, valuations still look attractive versus developed market assets and investors remain structurally underweight the asset class.
“The major headwinds in emerging markets for investors to be mindful of include further dollar strength, the continuation of US exceptionalism, a deeper Chinese growth slowdown and an escalation in trade tensions.”
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